Question

John Boy Lumber cuts logs to create 2 immediate joint products, lumber and sawdust. Unfinished lumber can be sold as is for $140 or processed further at a sales price of $270. Sawdust can be sold as is for $40 or processed further for a sales price of $50. There are joint product costs (costs up to the split off point) allocated to each of the products – $176 for lumber and $24 for sawdust. The cost of further processing is $40 for lumber and $20 for sawdust.

a. Should John Boy Lumber process lumber further or sell the unfinished lumber as is?

b. Should John Boy Lumber process the sawdust further or sell it as is?

Answer 1

a)	Should John Boy Lumber process lumber further or sell the unfinished lumber as is?
	Further process sale price	$        270
	Less:
	cost of further processing	$          40
	the sales price at the split of point	$        140
	Marginal revenue	$          90
	Since marginal revenue is positive John Boy Lumber should process lumber.
b)	b. Should John Boy Lumber process the sawdust further or sell it as is?
	Further process sale price	$          50
	Less:
	cost of further processing	$          20
	the sales price at the split of point	$          40
	Marginal revenue	$         -10
	Since marginal revenue is positive John Boy Lumber should sell sawdust as it is.